News & Insights


February 18, 2019

Health Headlines – February 18, 2019

Heading Off Health Plan Payment Reduction Tactics – King & Spalding is seeing a revival in many markets of the age-old health plan practice of denying line items and downgrading levels of care pre-payment. Health plans reduce payment to hospital providers with line item charge denials, assertions of improper bundling and unbundling of charges, as well as downgrades of levels of care.  Watch King & Spalding’s Healthcare Partner Leslie Murphy discuss the challenges and share strategies that hospital providers can use to address these payment reduction tactics.

Litigation Victory for NorthBay HealthCare Group – King & Spalding partner Daron Tooch represented NorthBay HealthCare Group, a two-campus hospital in Solano County, California at trial in the Northern District of California against Blue Shield for underpayment of non-contracted emergency and post-stabilization services. 

Blue Shield terminated its network contract with NorthBay effective December 2016, and immediately began paying NorthBay at less than half the rates provided for under the parties’ now-terminated contract.  NorthBay sued, seeking the reasonable value of the services provided to Blue Shield members, which it contended was significantly higher than the amounts paid by Blue Shield since termination of the contract.  Blue Shield countersued, contending that the reasonable value of NorthBay’s services was in fact even less than the amounts Blue Shield had been paying pursuant to its own reasonable value methodology.  After a six-day trial, during which the jury heard evidence of the array and quality of NorthBay’s services and the rates at which other commercial payors had contractually agreed to pay NorthBay, the jury was charged with answering a single question:  What is the reasonable value of the services NorthBay provided to Blue Shield’s members?  The jury returned a verdict of 67% of NorthBay’s full billed charges, nearly twice the amount that Blue Shield had been paying under its unilateral reasonable value methodology and far above the rates advocated by Blue Shield’s valuation expert witness.  The parties are now charged with applying the jury’s verdict to the more than 1,600 individual claims at issue, with total damages estimated at more than $16 million.

A copy of the verdict is available here.

Reporter, David Tassa, Los Angeles, + 213 443 4335,

King & Spalding Client Alert: The California Consumer Privacy is a Moving Target, and GDPR Compliance is Not Enough – The California Consumer Privacy Act (CCPA) is an unprecedented privacy law that grants California residents sweeping rights concerning the collection and use of their information. Once the law becomes effective on January 1, 2020, covered businesses can expect to weather a flurry of consumer requests, which can encompass information collected from January 1, 2019 forward. The CCPA defines both consumers and covered businesses broadly, grants far-reaching rights to consumers, and imposes extensive obligations on covered businesses. California’s ground-breaking legislation may encourage other states to follow suit, with some already considering similar legislation. For healthcare providers and pharmaceutical companies, patient medical information will generally be exempt from the CCPA, but personal information about prescribers and employees domiciled in California appears to be covered. For more information about the CCPA and recommended compliance steps, see the King & Spalding Data, Privacy and Security Client Alert, available here.

OIG Hospital Compliance Program Audit Claims $22 Million in Extrapolated Overpayments – A recent report issued by OIG finding an Indiana community hospital owed over $22 million in extrapolated overpayments carries some important lessons for hospitals audited under OIG’s hospital compliance program.  As described in the report, OIG focused its review on the hospital’s inpatient rehabilitation claims over a two-year period, and ultimately concluded that most of the sampled claims did not meet Medicare medical necessity standards for coverage and documentation.  The hospital compliance program under which the audit was undertaken involves a series of audits by OIG to measure hospital compliance with Medicare rules.  OIG’s report illustrates the complexity and scope of the billing issues and compliance challenges triggered by these compliance audits.

Using “computer matching, data mining and data analysis techniques,” OIG has assessed hospital claims based on risk of noncompliance with Medicare billing requirements.  The Community Hospital audit was focused primarily on a risk area identified during prior OIG reviews at other hospitals:  claims for inpatient rehabilitation services.  A stratified sample of 170 inpatient and outpatient claims was selected for audit, for purposes of determining the hospital’s compliance with Medicare requirements for billing services on selected types of claims.  Over half the claims in the sample were for inpatient rehabilitation services.  OIG found that 86 inpatient claims did not fully comply with Medicare billing rules, of which 63 were inpatient rehabilitation service claims.  In finding that Medicare criteria for the inpatient rehabilitation level of care were not met for these 63 claims, OIG cited both Medicare rules and sections of the Medicare Benefit Policy Manual for the coverage and documentation requirements that must be met for intensive inpatient rehabilitation services to be considered “reasonable and necessary.” 

The audit of the sampled claims resulted in net overpayments of $1,266,758.  Based on the sample results, OIG extrapolated that the hospital had received overpayments in excess of $22 million for the two-year audit period, which it recommended the hospital refund to the Medicare contractor.  Further, OIG recommended that, in accordance with the 60-day overpayment rule, the hospital should exercise reasonable diligence to identify similar overpayments outside the two-year audit period.

The hospital’s extensive response appended to the report takes issue with OIG’s findings with respect to all of the inpatient rehabilitation claims.  The hospital’s defenses raise a number of legal and factual issues with respect to the audit sample, the extrapolation process, and the substantive findings with respect to the coverage of the inpatient rehabilitation admissions:

  • The hospital argued that its inpatient rehabilitation claims during the same two-year period had been audited repeatedly, with some of the denials overturned on appeal and other denials still in the appeals process.  Aside from skewing samples and extrapolation, the hospital protested that neither these audit/appeal results nor its Programs to Evaluate Payment Patterns Electronic Report (PEPPER) reports showed its inpatient rehabilitation billings were outliers.  However, OIG’s audits will target providers submitting claims for services determined to be a risk to the Medicare program generally, and inpatient rehabilitation claims have been so identified.
  • In the course of the audit, the hospital engaged an independent board-certified physiatrist to review each of the challenged claims for inpatient rehabilitation.  The hospital’s expert confirmed that he would have personally admitted all but 12 of the 63 patients in issue for inpatient rehabilitation services, and that a physician having direct contact with the patients could have reasonably admitted those patients as well.  Although this independent expert analysis was provided to OIG prior to the issuance of its final report, OIG, having engaged a contractor to review these claims, did not modify its contractor’s findings or re-engage the contractor to conduct further reviews.  The hospital also challenged the expertise of OIG’s contractor in reviewing these types of specialized services.
  • The hospital argued that OIG’s reliance on the Medicare Benefit Policy Manual in evaluating its claims was inappropriate, insofar as this sub-regulatory guidance does not carry the force of rules formally adopted under the Administrative Procedure Act after public notice and comment.  The hospital urged that inpatient rehabilitation services must be evaluated under the fairly detailed provisions of the Medicare rules setting out conditions for coverage of these services.  Some judicial precedent supports the hospital’s position in this regard, as do certain policy memoranda issued last year by the Department of Justice.  However, not all authorities are unanimous on this point. 
  • The hospital engaged a statistician to challenge OIG’s sampling methodology, the basis for extrapolation over the two-year period to arrive at the $22 million overpayment amount, and the recommendation that the hospital further examine additional periods outside that two-year time frame.  In addition to technical questions based on OIG’s elimination of some claims from the original sample and the extrapolation methodology as applied to the stratified sample, the hospital argued that extrapolation is improper when the claims denial is based on medical necessity and where coverage standards require professional review of individual cases.  While at least one case supports this position in the context of inpatient rehabilitation claims, the authorities are generally split on this point as well.

As noted in the report, OIG’s audit recommendations are not final determinations by the Medicare program, but recommendations to CMS.  However, when OIG audit recommendations are passed to CMS and the MAC, the provider is faced with a formal demand for refund of the extrapolated overpayment.  At that point, the provider must be prepared to appeal within a relatively short period (30 days) in order to stay recoupment.  Medicare Part A/B administrative appeals involve five levels of review, requiring that the provider invest significant time and expense to engage experts and attorneys in order to counter the findings of OIG’s audit contractor, and to challenge statistical sampling and extrapolation.  Further, after the second level, the agency may initiate recoupment even if the provider proceeds with additional levels of appeal. 

This audit report reflects a rising tide in the overpayment demands stemming from OIG hospital compliance audits, particularly where OIG has hired third party contractors to serve as auditors.  The extrapolated overpayment amount, coupled with OIG’s recommendation that the hospital undertake a broader review of claims outside the two-year audit period to comply with the 60-day overpayment refund rule, illustrates the serious financial consequences that may flow from adverse audit findings.  Hospitals would be well-advised to approach these audits with significant caution, and be prepared to channel substantial compliance, legal and expert resources to engage OIG and its contractor during the audit process, and to respond to adverse recommendations. 

Reporters, Kim Roeder, Atlanta, +1 404 572 4675, and Sara Kay Wheeler, Atlanta, +1 404 572 4685,

OCR Recovers $28.7 Million from 2018 HIPAA Enforcement Actions – According to a summary released by the HHS Office for Civil Rights (OCR), in 2018, OCR settled 10 cases and was granted summary judgment in one case totaling $28.7 million in recoveries for alleged violations of the Health Insurance Portability and Accountability Act (HIPAA).  This sets the record for total annual recoveries, following $23.5 million recovered by OCR in 2016.  

OCR also set the record for the single largest settlement of $16 million with Anthem, Inc. to settle allegations that Anthem violated certain HIPAA requirements prior to and following a 2015 cyber-attack in which protected health information (PHI) of nearly 79 million individuals was stolen from Anthem’s enterprise data warehouse. This settlement was nearly three times larger than OCR’s previous record settlement of $5.5 million with Advocate Health Care in 2016.  Additional details regarding the Anthem settlement are available here.

OCR’s final settlement of the year was with Cottage Health for $3 million regarding two alleged breaches of unsecured electronic protected health information (ePHI) affecting over 62,500 individuals, one in December 2013 and another in December 2015. The breach exposed unsecured ePHI over the internet including patient names, addresses, dates of birth, Social Security numbers, diagnoses, conditions, lab results and other treatment information. OCR alleged that Cottage Health failed to accurately and thoroughly assess the potential risks and vulnerabilities; failed to implement sufficient security measures; failed to implement procedures to perform periodic evaluations in response to changes affecting the security of ePHI; and failed to enter into a written business associate agreement with a contractor that maintained ePHI on Cottage Health’s behalf. Cottage Health also agreed to enter a corrective action plan. The Cottage Health settlement and corrective action plan can be found here.

OCR’s summary of its 2018 HIPAA settlements can be found here.

Reporter, Kirstin E. Rodrigues, Atlanta, + 404 572 4671,

Court Grants TRO Requested by DOJ to Shut Down Pharmacies Accused of Controlled Substances Act Violations – On Thursday, February 7, 2019, the U.S. District Court for the Middle District of Tennessee granted a request by the Department of Justice (DOJ) for a temporary restraining order (TRO) to close two pharmacies accused of unlawfully dispensing opioids resulting in patient overdoses and deaths.  The TRO was issued at the start of a civil action brought for violations of the Controlled Substances Act without advance notice to the pharmacies.  This opens up an avenue for the DOJ to temporarily shut down pharmacies evidencing distribution of controlled substances outside the normal course of the professional practice of pharmacy without going through the lengthy and difficult administrative process of suspending or removing the pharmacy’s registration with the Drug Enforcement Administration.   

The request for a TRO was filed under seal concurrently with a sealed civil complaint brought by the federal government against defendants Dale Hollow Pharmacy, Xpress Pharmacy and their owner/operator and pharmacists-in-charge (U.S. v. Oakley Pharmacy, Inc., et al., U.S. District Court, Middle District of Tennessee, Case No. 2:19-cv-0009).  The complaint alleges that the pharmacists-in-charge at both pharmacies repeatedly ignored indicia of abuse in filling prescriptions for controlled substances without legitimate medical purpose, leading to multiple incidences of overdose including two incidences leading to patient deaths.  The complaint seeks injunctive relief and monetary penalties for violations of the Controlled Substances Act and False Claims Act. 

That same day, District Judge Aleta A. Trauger granted the government’s request for a TRO without the need for advance notice to defendant pharmacies, finding in part that if defendants were aware of the action and pending search warrants, there was risk that evidence would be destroyed.  The Court ordered that the TRO could be served on defendants on the same date when the agency executed search warrants at the two defendant pharmacies.  

Further hearing on this matter is set for February 21, 2019, to determine whether a preliminary injunction should be issued continuing the shutdown of the two defendant pharmacies.

A copy of the complaint is available here.  A copy of the order granting the TRO is available here. 

Reporter, Jonathan Shin, Los Angeles, + 1 213 443 4334,

CMS Proposes National Coverage Decision For CAR-T Cancer Therapy – On February 15, 2019, CMS released a proposal to provide nationwide coverage for a new cancer therapy, Chimeric Antigen Receptor T-cell Therapy (CAR-T Therapy), for Medicare patients. The proposed nationwide coverage decision (NCD) would require Medicare to cover FDA-approved CAR-T Therapy through CMS’ Coverage with Evidence Development (CED) program. CED allows CMS to approve an item or service in the context of a clinical study. Under the proposed NCD, a patient may obtain CAR-T Therapy so long as it is being offered in a CMS-approved registry or clinical study and the patients are monitored for at least two years post treatment. CMS Administrator Seema Verma stated in a press release that the “proposed coverage decision would improve access to this therapy while deepening CMS's understanding of how patients in Medicare respond to it.” 

CMS notes that CAR-T Therapy is a “precision cancer treatment wherein each treatment dose is individually manufactured for the patient using their own T-cells, a type of white blood cell known as a lymphocyte. CAR T-cell therapy is a rapidly emerging adoptive cell transfer immunotherapy for select patients with relapsed or refractory cancers.” CMS’s proposal would allow patients to access FDA-approved versions CAR-T Therapy. Specifically, the FDA in 2017 approved two version of CAR-T Therapy: tisagenlecleucel (Kymriah®) and axicabtagene ciloleucel (Yescarta®).

Although current Medicare patients can get coverage for CAR-T Therapy on a case-by-case basis with Medicare Administrative Contractors having discretion over whether to pay for CAR-T Therapy, CMS’s proposal would allow for coverage nationwide so long as CMS’s criteria for CED is met, including participation in a clinical study. CMS states that the data collected through the studies “would help CMS identify the types of patients that benefit from CAR T-cell therapy, informing a future decision by the agency regarding the types of cases in which Medicare would cover the treatment with no registry or trial requirement.”

CMS is seeking comments on the proposed NCD. A final decision will be issued no later than 60 days after the conclusion of the 30-day public comment period. Public comments on the proposal may be submitted here.

CMS’s press release on the proposed coverage of CAR-T Therapy can be found here. CMS’s Proposed Decision Memo for CAR-T Therapy can be found here and additional information from CMS’s National Coverage Analysis can be found here.

Reporter, Kiel Yager, Sacramento, + 1 916 321 4811,

California Federal Judge Rules Insurer Not Obligated to Pay Los Angeles Hospital’s $42 Million Settlement and Investigation Costs in Contract Dispute Over Coverage Policy – On February 12, 2019, U.S. District Court Judge Stephen V. Wilson dismissed a suit brought by Pacific Alliance Medical Center (PAMC) alleging, among other counts, breach of contract against its insurer for failure to cover the hospital’s $42 million settlement of a False Claims Act (FCA) suit or its costs to respond to a related Department of Justice (DOJ) investigation.  The court held that the hospital failed to provide notice of the claims within the period enumerated by the coverage policy.  Judge Wilson was unconvinced by the hospital’s various arguments, including that it was precluded from giving notice during that period because of non-disclosure language in the DOJ’s subpoena cover letter. 

In 2013, a relator filed a qui tam action under seal against PAMC alleging violations of the Federal and California FCAs, seeking recovery of treble damages and civil penalties.  The relator alleged that the hospital paid above-market rates to rent office space in physicians’ offices in exchange for referrals and entered into marketing agreements that provided undue benefit to physicians’ practices.  In June 2015, PAMC received a subpoena from the DOJ related to the FCA investigation.  The cover letter to the subpoena read, in part, as follows:

Because this subpoena relates to an ongoing criminal investigation, this Office requests that you not disclose the existence of or compliance with the subpoena for an indefinite period of time or until the Office notifies you that the investigation has been completed or until a court orders disclosure. Premature disclosure could impede the investigation and interfere with the enforcement of the law. We request that you give this Office advance notice if you plan to disclose the existence of or compliance with the subpoena.

The court unsealed the complaint in December 2015.  In the meantime, PAMC and the relator participated in mediation while PAMC cooperated with the DOJ investigation.  On January 5, 2017, PAMC received a letter from the DOJ stating that the criminal investigation was complete and that it did not intend to pursue criminal charges.  Shortly thereafter, PAMC and the relator reached a settlement agreement on February 11, 2017.  On April 20, 2017, PAMC provided written notice to its insurer, National Union Fire Insurance Company of Pittsburgh, PA (National Union), regarding the subpoena and the whistleblower action, seeking coverage for each of those proceedings under its policy.  National Union denied coverage under the rationale that the claims were made in the 2015-2016 coverage period, and PAMC had failed to report them during that time.  This lawsuit ensued. 

The terms of the 2015-2016 insurance policy provided coverage for all “claims first made” during the policy period or within 90 days from the end of the policy period.  The court determined that “the unambiguous language in this provision means that a claim against [PAMC] is only covered by a given year-long policy period if that claim is ‘first’ made against [PAMC] during that policy period,” noting that “first made” is when the hospital “first becomes aware of the [c]laim.”  For that reason, the court held that PAMC notified National Union of the whistleblower action and DOJ subpoena after the one-year reporting period (and ninety-day grace period) and, therefore, National Union rightfully denied coverage to PAMC under the terms of the policy.

The court rejected PAMC’s various attempts to argue either that the policy should not be interpreted rigidly or that PAMC was somehow precluded from reporting to National Union during the window of time set in the policy.  Notably, PAMC argued that it was not legally able to provide notice of the subpoena or the whistleblower action to National Union because of nondisclosure language in the DOJ’s cover letter to the subpoena.  Unconvinced, the court noted that the DOJ’s cover letter did not affirmatively prohibit PAMC from making a disclosure, and allowed PAMC to request DOJ’s permission to provide notice to National Union for purposes of seeking insurance coverage – a step that PAMC did not take. 

The court’s decision serves as a cautionary tale for hospitals.  Moreover, it reminds providers to review their insurance policy’s reporting provisions and revisit their internal reporting protocols to avoid risking a similar outcome to this case.

The court’s opinion is available here. The DOJ’s press release regarding the settlement is available here.

Reporter Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579,

Upcoming Roundtable on Strategies for Challenging Health Plan Policies That Impact Coverage and ReimbursementOn February 27, 2019, King & Spalding will host a Life Sciences & Healthcare Roundtable titled “Strategies for Challenging Health Plan Policies That Impact Coverage and Reimbursement.”  Please join King & Spalding presenters Jim Boswell, John Barnes, Jennifer Lewin, and Vinay Kohli as they address a wide range of issues of importance to healthcare providers, including the following:

  • Recently-implemented health plan policies that are having a significant impact on providers, including advanced imaging site of service policies and policies targeting reimbursement for emergency services;
  • Negotiation strategies to limit or eliminate a health plan’s contractual right to adopt adverse payment polices, or to make the provider whole if a newly-adopted policy will have a detrimental effect on the provider’s revenue;
  • Litigation strategies to challenge a health plan’s implementation of a payment policy; and
  • Strategies for quantifying the impact of these policies.

The Roundtable will be held as a webinar from 1:00 p.m. – 2:30 p.m. ET.  There is no charge to attend.  Please click here to register.

28th Annual King & Spalding Health Law & Policy Forum – Please join us on March 18, 2019, for a one-day conference at the St. Regis Hotel in Atlanta focusing on the latest legal and political developments affecting the healthcare industry.  The keynote speaker will be Dr. Sanjay Gupta.  A multiple Emmy® award winning chief medical correspondent for CNN, Gupta is a high-profile practicing neurosurgeon who plays an integral role in CNN’s reporting on health and medical news for all of CNN’s shows domestically and internationally and contributes to  King & Spalding partner Sally Yates will be the featured speaker.  Yates is the former Deputy Attorney General and Acting Attorney General of the United States.  For registration information, please click here.

20th Annual Emerging Issues in Healthcare Law Conference – Please join King & Spalding partner and conference co-chair Kathy Poppitt in Orlando on March 13-March 16, 2019, to celebrate the ABA Health Law Section’s 20th Annual Emerging Issues in Healthcare Law Conference with us.  This year’s conference offers illuminating sessions and invaluable networking opportunities.  King & Spalding partners John Barnes and Travis Jackson will be speaking.  John Barnes will be speaking in a session titled, “Legal and Practical Implications of Reference-Based Pricing,” and Travis Jackson will be speaking in a session titled, “The Opioid Crisis: Will Good Intentions Finally Lead to Good Outcomes?”  Please click here to register and here to check out this year’s brochure to learn more about the 20th anniversary.